Federated National Holding's CEO Discusses Q2 2013 Results - Earnings Call Transcript

|
 |  About: Federated National Holding Company (FNHC)
by: SA Transcripts

Federated National Holding Co. (NASDAQ:FNHC)

Q2 2013 Results - Earnings Call Transcript

August 8, 2013 4:30 PM ET

Executives

Michael Braun - Chief Executive Officer and President

Pete Prygelski - Chief Financial Officer and Treasurer

Analysts

William Meyers - Miller Asset Management

Doug Ruth - Lenox Financial Services

Casey Alexander - Gilford Securities

Lee Matheson - Broadview Capital Management

Operator

Good afternoon and welcome to the Federated National Holding Company’s second quarter 2013 financial results conference call. My name is Nicole and I'll be your operator today. Please note that today’s call is being recorded. At this time, all participants are in a listen-only moderate. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

The statements in this conference call that are not historical facts are forward-looking statements. Without limiting the generality of the foregoing words such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, possibly, potential, project, probably, pro forma, project, seek, should, target or will or the negative thereof or other variations thereon and similar words or phrases or comparable terminology are intended to identify forward-looking statements.

The matters discussed on this call that are forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized. Actual events, outcomes, and results may differ materially from what is expressed or forecasted in the forward-looking statements made on this call due to numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in this conference call, our press release issued today and other filings made by the company with the SEC from time to time.

The forward-looking statements made during this presentation speaks only as of the date on which they are made and Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise.

Now at this time, I would like to turn the conference over to Michael Braun, Chief Executive Officer and President of Federated National Holding Company. Please go ahead, sir.

Michael Braun

Good afternoon, and thank you for joining us to discuss Federated National Holding Company’s second quarter 2013 financial results. I’m joined on the call by Pete Prygelski, our Chief Financial Officer. Our financial results for the quarter can be found in our earnings press release. I will go over some brief highlights from the quarter and then Pete and I will open up the line for questions.

Highlights, as measured against the same three month period last year, include 113% increase in gross premiums written, 78% increase in earnings per share, 97% increase in year-to-date earnings per share, 68% increase in revenue, 66% increase in net premiums earned, 59% increase in homeowner policy count to approximately 84,000.

Key performance and metrics in the second quarter continued to improve. We experienced tremendous growth in written premiums, revenue and earned premium. We continue to build our policy base while maintaining our stringent underwriting criteria.

Our policy count which increased 59% year-over-year grew an additional 7% in July to approximately 90,000. The profitability of the policies we are writing has given us the flexibility to make investments design to expand the business model into other lines and other states.

We continue to believe that maintaining a lean operating structure is critical to delivering shareholder value, hence we are pleased to announce that we’ve maintained our operating cost as a percentage of revenue at 40% despite our rapid growth.

Through our actions we believe we have set the stage for sustainable financial results over the long term.

With that, we are glad to open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from William Meyers of Miller Asset Management.

William Meyers – Miller Asset Management

Good quarter. That was like a quickest presentation than I have ever heard, but it was great. I just had one question which is related to your new relationships, I believe it's with Allstate and in the past I think you've said in the past during wind seasons you were more cautious about writing policies. And I'm wondering if you are maintaining, if you are planning on maintaining that, that caution this year as you get into the win season and if the Allstate relationship would offer that in anyway?

Michael Braun

William, thank you. The Allstate relationship is going very well. We continue to write new business. I believe the last quarter we said we’re writing about 3 million a week of new business. And I would say that we're writing between 3.5 million to 4 million total new business, plus of course our renewals. So the homeowner business continues to go well.

Normally we do restrict writing during the win season. However, I believe the margins support and there is a great opportunity in the market for us to be more aggressive in terms of market share that we are writing through win season.

But one thing you need to know about that is that will impact us in the third quarter. And what I mean by that is, we have bought reinsurance and we've actually bought additional reinsurance, our reinsurance now goes up to about $420 million. So we continue to write a tremendous amount of business. Therefore, we have purchased additional reinsurance and obviously that comes at a larger cost.

It's about, we're at about 60 million, but with the adjustments on it, it could be as high as 70 million. So what that means is we bought for what we intent -- what we think or book will be at September 30th, and what that means is that we have reinsurance in place for policies that are still being bound, in other words we've continued to buying policies today. So if it's bound today we will only have, let's say six weeks of premium in the quarter, yet 13 weeks of reinsurance expense.

So it's going to impact us in the third quarter, however we believe it's the right thing to do based on the market, the opportunities there as well as the margins or the entire year of the policy as well as with renewals.

William Meyers – Miller Asset Management

Hey, that level of detail was really helpful and I appreciate it. Again congratulations on the quarter.

Michael Braun

Operator

(Operator Instructions) Our next question comes from the line of Doug Ruth of Lenox Financial Services. Your line is now open.

Doug Ruth - Lenox Financial Services

Hey, I also want to say the part of absolutely fabulous, I was wondering Mike, if you can give us little bit more detail as far as the three and a half, [formally] in a week, is that stabilizing is it still increasing maybe you can give us a sense of how the quarter progressed?

Michael Braun

Sure, thanks Doug. We are continue on the right 3.5 to 4, I really don’t see that slowing down at all. Yeah I see the possibility that will tick up in the fall as well when a lot more policies in the state come up for expiration, through a lot of in the marketplace, but that leads us to capital.

And our ratios are fine right now, however for us to maintain writing this business, as I said in the last earnings call, we are looking at brining an additional capital into the company.

So we are progressing with that right now and we haven't made a final decision on the board level but I would say with high probability we're going to bringing in additional capital which is needed to maintain all of our ratios as we continue to grow our book of business. Because once again, we do believe our business is profitable however they earned premium on it, it does take time to earn that out as well as lot of the expenses are front end our (inaudible) in front of the policy. So I don’t see any reason why we would slow down production.

Doug Ruth - Lenox Financial Services

Okay, thank you for that. And could you give us a state of the industry and what stat book where you think Florida is at this point?

Michael Braun

Sure, I think that its turning back to our more normal market and then I don’t know how you specifically even use the word normal in Florida property, because it's been rather dysfunctional for the last 20 plus years. But I think that most carriers are having adequate rate, that was a challenge for years, obviously with the mitigation credits and Citizens being so cheap being the super competitor.

But I think that we were clearly a prefer carrier in the state, I think that agents will place the business with us, when they can as long as their rates are competitive, and I believe our rates are competitive on the risk that we're interested in.

And some new participants have entered the marketplace and I wouldn't doubt it if a few more entered at the end of the year. But I think there's great opportunities for us to continue our growth because we focus on the basics, which is fantastic service to our agents and to our insurances and we believe that translates into profitable growth to our company.

Something that's coming up on January 1 as a clearing house us with Citizens another initiative by Citizens to shrink is policies will go through, what they're calling a clearing house, where private carriers would be basically bidding on those policies if they're interested and really the [insured] will be not eligible for Citizens if there is, in the admitted market if there is an opportunity being placed with.

So I think that you're are going to see that Citizen's continue to shrink. I think you're going to see the voluntary market continue to grow. And I think you are going to see opportunities with [de-pops] continue to decrease. We have not participated in de-pops in a number of years. We did it in 2004 and in 2009 and I think everyone knows my opinion on the de-pops. We're committed to our business model which I think is working well.

Doug Ruth - Lenox Financial Services

Thank you for that and what about, at this point, is there, are all state agents, is everybody that wants from all state that wants to sell the Federated product. Have they all up and running at this time?

Michael Braun

Yes, throughout the second quarter we clearly had a ramp up in place and I would agree with your statement that all Florida all state agents that are allowed to write with us from their parent company and that we have appointed are up and running absolutely.

Doug Ruth - Lenox Financial Services

And then maybe you could offer my final question, then would be if you could just, in the past you had told us that you have these four pillars and I was wondering if you have this four pillar approach and I was wondering if you could maybe tell us how things are progressing as far as that goes?

Michael Braun

Absolutely, the four pillars once again being the disciplined underwriting. We really remained committed to that. That's where it all starts. Risk management, obviously, we buy a tremendous amount of reinsurance and we want to make sure that what we're buying is sustainable and models well.

Expense control, I think we run a very lean efficient business and product distribution which we touched on basically and briefly in the press release, which is we’re actually looking to expand homeowners in two additional states. And I believe that we'll be launching, we'll be writing our first policy, I believe in the fourth quarter in Louisiana and Alabama, which is rather exciting.

It's going to be a very go slow approach and I don’t think it will be impacting us significantly in any way, but it just shows that, where we pulled back in couple of years ago, when we were struggling with some of the things in our core business, we're comfortable expanding back outs to some other opportunities.

Doug Ruth - Lenox Financial Services

Okay. Well thank you for answering my questions and congratulations on a beautiful report.

Michael Braun

Thank you, Doug.

Operator

Our next question comes from the line of Casey Alexander with Gilford Securities. Your line is now open.

Casey Alexander - Gilford Securities

Yeah. Hi good afternoon.

Michael Braun

Hi Casey, how are you?

Casey Alexander - Gilford Securities

I am fine thanks. United Insurance Property and Casualty also had a referral program was offset, is your program in addition to that, or did you displace them in that program?

Michael Braun

Well, I can’t speak behalf of United, I don’t know specifically what their arrangement is, but I can tell you that my understanding is is that we're one of a few carriers that all state agents are authorized to write.

Casey Alexander - Gilford Securities

Okay. My other questions were answered already. Thank you.

Michael Braun

Thank you, Casey.

Operator

Thank you. Our next question comes from the line of Lee Matheson, Broadview Capital Management. Your line is now open.

Lee Matheson - Broadview Capital Management

Hey guys.

Michael Braun

Hi Lee, how are you?

Lee Matheson - Broadview Capital Management

Good thanks and you?

Michael Braun

Great, thanks.

Lee Matheson - Broadview Capital Management

Thanks for taking my call. I have couple of housekeeping stuff, where was [Stat] capital of the carrier at the end of the quarter?

Michael Braun

$55 million.

Lee Matheson - Broadview Capital Management

$55 million, okay.

Michael Braun

Yes.

Lee Matheson - Broadview Capital Management

And I think that the bond portfolio is like a bit of ahead which is why book value was flat quarter-over-quarter?

Pete Prygelski

Exactly, we lost approximately $2.2 million unrealized, change and unrealized is 2.2 million to the net, went from 4 million on unrealized position to about what was that view, about 1.8 million. So we loss about 2.2 which is

Lee Matheson - Broadview Capital Management

Okay. And then that was all fixed income?

Pete Prygelski

I would say 80% of it was fixed income yes.

Lee Matheson - Broadview Capital Management

Okay. And then any losses, anything in prior from prior periods there or is that all current.

Michael Braun

What we do is obviously is we review the loss in LAE every quarter. So that's in the press release, which let me disclose here, it's about 52% and that tends to where we've been. In this last quarter, we had a couple of big hits to losses as well as reserves but I means that why we're in the business course. So some quarters you get bigger losses than others. And actually we've taken the step into last about year and half where we've actually bought more reinsurance, I should say we bought reinsurance from non cap perspective. So it help us with these large losses, but they are going to have and that's already business of doing of the same claims.

Lee Matheson - Broadview Capital Management

Yeah. Okay. Sorry this is on the TGL side.

Michael Braun

On all of our lines.

Lee Matheson - Broadview Capital Management

Okay. This clearing how was structure that, sort of things are putting in place. I mean your envision is taking away the large block November deep off transactions that they have been focused on.

Michael Braun

I absolutely believe it will do that, I don't think this year or calendar year 2013, I think you're going to get some big deep ups happenings in December, I guess 200,000, 300,000 I don't know for sure. But clearly that lake is getting fished out and no fish are going to be answering it. So I believe that you're going to see January 1, if it’s supposed to be up and running, I believe that’s an aggressive time table but I am confident that we’ll be able to interact with the clearing house to ensure that any risk that we are interested in that we would want to right those. But I will say this, we already getting to look at most of those risks, before they even go into the clearing house. So I don’t think it is going to be a significant impact on us but it’s going to change the market place.

Lee Matheson - Broadview Capital Management

Okay, just as you guys sort of layer on the policy count and the insured value, can you just kind of give us give us some anecdotal view on what would happen to your book if the 2004 storm season hit again today and how comfortable are that you could hold up?

Pete Prygelski

Yeah, certainly as I said approximately 420 million of cover. The storms that hit in ‘04, Charlie, Francis Ivan and (inaudible) in ‘05 [Danis], Katrina, Rita, Wilma as well as Andrew back in ‘92 we were running property back then. The last numbers that I have which is probably around 90 days old none of those storms have pierced a $100 million according to the models results. So I have great comfort at 420 million that we have sufficient reinsurance.

Lee Matheson - Broadview Capital Management

Okay, great, and then finally you hinted at a capital raise to fund growth, what I guess the stocks back above meaningfully above tangible book, are you thinking of equity [issuance] or is there some more lower cost way to get capital in the door?

Michael Braun

Well, we are looking at both, we are looking at equity as well as convertible, we haven’t made a decision on that. Obviously there is pros and cons both ways, so I think that we have adequate capital today but clearly the volume of business that we are writing because of the rapid growth from a statutory perspective there are some cumulative things that occur with the numbers, so I believe we’ll raise capital and I believe we’ll deploy efficiently.

Lee Matheson - Broadview Capital Management

Yes, because you are not able to capitalize deferred premium acquisition cost on to your [stag] capital right?

Michael Braun

Yeah, there is a couple of things, there’s other ratios that you look at as well, both with ratios as well as RBC and things like that, that you have to be aware. So we are managing that and to maintain this growth that we have, we are comfortable with our book of business we are very sensitive that we don’t want to deliver our shareholders however opportunities that are accretive, waiting for optimal business required as capital and we are doing that analysis right now.

Pete Prygelski

Lee it’s Pete I just want to follow up on the bond portfolio. In early January shortening the duration of that portfolio from about 5 years to 3.5 years. So the impact of book value wasn’t as great as it could have done, and I think going forward because how we had the portfolio now positioned any further as the rates rise, we should be impacted a lot less then people who are little longer than us in the duration.

Lee Matheson - Broadview Capital Management

Yeah you are still at 3.5?

Pete Prygelski

We are at about 3.5 right now.

Operator

(Operator Instructions)

Michael Braun

Well it appears there is no other callers. We want to thank everyone for listening in as well as the callers that called in with their questions. We do have a question coming in. We will take that question.

Operator

Our next question is from (inaudible), a private investor. Your line is open.

Unidentified Analyst

I was just wondering what the dividend prospects are in the future as far as increases in.

Michael Braun

Sure, yes, we evaluate that as a Board every quarter and we've done so obviously. We reinstituted it and have increased it in the last year. We know that a lot of our shareholders enjoy the dividend. Ironically, not all and we do hear from some people that are less interested in dividend, but we believe that as a Board have a good balance of creating value for our shareholders which includes a dividend. So we will be voting on that shortly, but I am comfortable with our businesses running well and while I can’t guarantee anything in the future, I don't see anything that would impact the dividend in the near-term. We know that’s important to our shareholders.

Operator

And I am showing no further questions at this time. I would like to hand the conference over to Michael Braun. You may begin.

Michael Braun

Well, lest anyone else has a last minute question here, we will go ahead and close out the call. Thank you very much for your interest. We will continue to remain focused on doing what we do for our shareholders and our policy holders. If there is follow up questions, obviously Pete and I, our contact information is out there and feel free to give us the call. So thank you very much.

Operator

Ladies and gentlemen, thank you for listening in today’s conference. This does conclude today’s program. You may all now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!